TELEFLEX INC — Interim / Quarterly Report 2003

Nov 12, 2003

10-Q 1 w91285e10vq.htm FORM 10-Q TELEFLEX INCORPORATED e10vq PAGEBREAK

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2003

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-5353

TELEFLEX INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

| Delaware (State of Incorporation) | 23-1147939 (IRS Employer Identification
Number) |
| --- | --- |
| 155 South Limerick Road Limerick, PA (Address of Principal Executive
Office) | 19468 (Zip Code) |

(610) 948-5100

(Telephone Number Including Area Code)

630 West Germantown Pike, Suite 450

Plymouth Meeting, PA 19462

(Former Name, Former Address and Former Fiscal Year,

If Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

þ Yes o No

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.

Class	Outstanding at September 28, 2003
Common Stock, $1.00 Par Value	39,691,201

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link1 "TELEFLEX INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in Thousands)"

TELEFLEX INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in Thousands)

	Sept. 28,	Dec. 29,
	2003	2002
ASSETS
Current assets
Cash and cash equivalents	$ 46,553	$ 44,494
Accounts receivable less allowance for doubtful
accounts	452,336	401,888
Inventories	430,355	365,535
Prepaid expenses	23,462	25,978
	952,706	837,895
Property, plant and equipment, at cost, less
accumulated depreciation	635,700	604,241
Goodwill	278,275	257,999
Intangibles and other assets	105,242	68,810
Investments in affiliates	35,962	44,439
	$ 2,007,885	$ 1,813,384
LIABILITIES AND SHAREHOLDERS’
EQUITY
Current liabilities
Current portion of borrowings and demand loans	$ 234,952	$ 182,776
Accounts payable and accrued expenses	317,599	276,938
Income taxes payable	48,780	38,769
	601,331	498,483
Long-term borrowings	216,990	240,123
Deferred income taxes and other	178,644	162,497
	996,965	901,103
Shareholders’ equity	1,010,920	912,281
	$ 2,007,885	$ 1,813,384

The accompanying notes are an integral part of the condensed consolidated financial statements.

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TELEFLEX INCORPORATED

link1 "CONDENSED CONSOLIDATED STATEMENT OF INCOME"

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Dollars and Shares in Thousands, Except Per Share)

	Three Months Ended — Sept. 28,	Sept. 29,	Nine Months Ended — Sept. 28,	Sept. 29,
	2003	2002	2003	2002
Revenues	$ 550,850	$ 508,238	$ 1,675,016	$	1,562,940
Cost of sales	410,611	375,749	1,237,892		1,146,429
Operating expenses	108,350	93,069	308,763		272,808
Interest expense	6,580	6,280	19,755		18,555
Non-operating gain	—	—	(3,068	)	—
	525,541	475,098	1,563,342		1,437,792
Income before taxes	25,309	33,140	111,674		125,148
Provision for taxes on income	7,087	6,860	32,376		34,914
Net income	$ 18,222	$ 26,280	$ 79,298	$	90,234
Earnings per share
Basic	$ 0.46	$ 0.67	$ 2.01	$	2.30
Diluted	$ 0.45	$ 0.66	$ 1.99	$	2.27
Dividends per share	$ 0.20	$ 0.18	$ 0.58	$	0.53
Average number of common and common equivalent
shares outstanding
Basic	39,655	39,341	39,547		39,207
Diluted	40,072	39,820	39,870		39,809

The accompanying notes are an integral part of the condensed consolidated financial statements.

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TELEFLEX INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in Thousands)

	Nine Months Ended — Sept. 28,	Sept. 29,
	2003	2002
Cash flows from operating activities:
Net income	$ 79,298	$	90,234
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation expense	73,158		65,509
Amortization expense	5,954		4,197
Increase in accounts receivable	(18,316	)	(8,795	)
Increase in inventory	(12,028	)	(29,276	)
Decrease in prepaid expenses	5,783		3,603
Increase in accounts payable and accrued expenses	9,739		13,121
Increase in income taxes payable	11,777		11,995
	155,365		150,588
Cash flows from financing activities:
Proceeds from new borrowings	—		1,457
Reduction in long-term borrowings	(21,109	)	(23,796	)
Increase in current borrowings and demand loans	28,288		4,857
Proceeds from stock compensation plans	3,786		9,696
Dividends	(22,937	)	(20,771	)
	(11,972	)	(28,557	)
Cash flows from investing activities:
Expenditures for plant assets	(67,476	)	(66,563	)
Payments for businesses acquired	(74,436	)	(49,863	)
Proceeds from sale of businesses and assets	4,728		—
Investments in affiliates	(956	)	(93	)
Other	(3,194	)	2,017
	(141,334	)	(114,502	)
Net increase in cash and cash equivalents	2,059		7,529
Cash and cash equivalents at the beginning of the
period	44,494		46,900
Cash and cash equivalents at the end of the period	$ 46,553	$	54,429

The accompanying notes are an integral part of the condensed consolidated financial statements.

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TELEFLEX INCORPORATED

STATEMENT OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended — Sept. 28,	Sept. 29,		Sept. 28,		Sept. 29,
	2003	2002		2003		2002
Net income	$ 18,222	$	26,280	$	79,298	$ 90,234
Financial instruments marked to market	236		(3,401	)	1,978	(1,445	)
Cumulative translation adjustment	(925	)	(4,299	)	30,458	14,824
Comprehensive income	$ 17,533	$	18,580	$	111,734	$ 103,613

The accompanying notes are an integral part of the condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1

The accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 28, 2003 and September 29, 2002 contain all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly the financial position, results of operations and cash flows for the periods then ended in accordance with the current requirements for Form 10-Q. At September 28, 2003, 5,201,859 shares of common stock were reserved for issuance under the Company’s stock compensation plans.

Note 2

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that certain guarantees be recognized as liabilities at fair value at their inception date and requires certain disclosures by the guarantor in its financial statements about its obligations. In the ordinary course of business, the Company provides routine letters of credit, indemnifications and other guarantees whose terms range in duration and often are not explicitly defined. Adoption of FIN 45 did not have a material impact on the results of operations or financial condition of the Company.

Note 3

In May 2003, the FASB issued Statement No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of FAS 150 did not have a material impact on the results of operations or financial condition of the Company.

Note 4

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. FIN 46 requires a company to consolidate a variable interest entity if it is the primary beneficiary of that entity. A variable interest entity is generally defined as an entity whose equity investors do

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4 — (continued)

not have a controlling financial interest or sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 also has a disclosure requirement for all variable interest entities of a company, even if the company is not the primary beneficiary. FIN 46 is applicable to variable interest entities created after January 31, 2003. The provisions are effective for the first interim or annual period ending after December 15, 2003 for those variable interests held prior to February 1, 2003. While the Company believes this Interpretation will not have a material effect on its results of operations or financial condition, it is continuing to evaluate the effect of adoption of this Interpretation.

Note 5

The Company has stock-based compensation plans that provide for the granting of incentive and non-qualified options to officers and key employees to purchase shares of common stock at the market price of the stock on the dates options are granted. No stock-based employee compensation cost is reflected in net income. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”:

	Three Months Ended — Sept. 28,	Sept. 29,		Sept. 28,		Sept. 29,
	2003	2002		2003		2002
Net income, as reported	$ 18,222	$	26,280	$	79,298	$	90,234
Deduct: Stock-based employee compensation expense
using a fair value method	(1,080	)	(896	)	(3,231	)	(2,648	)
Pro forma net income	$ 17,142	$	25,384	$	76,067	$	87,586
Earnings per share:
Basic
As reported	$ 0.46	$	0.67	$	2.01	$	2.30
Pro forma	$ 0.43	$	0.65	$	1.92	$	2.23
Diluted
As reported	$ 0.45	$	0.66	$	1.99	$	2.27
Pro forma	$ 0.43	$	0.64	$	1.92	$	2.21

Note 6

Changes in the carrying amount of goodwill for the nine months ended September 28, 2003, by operating segment, are as follows:

	Commercial	Medical	Aerospace	Total
Goodwill, net at December 29, 2002	$ 94,566	$ 137,272	$ 26,161	$ 257,999
Goodwill acquired	12,258	—	—	12,258
Translation adjustment	5,834	2,058	126	8,018
Goodwill, net at September 28, 2003	$ 112,658	$ 139,330	$ 26,287	$ 278,275

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reflects the components of intangible assets:

	Sept. 28, 2003 — Gross Carrying	Accumulated	Dec. 29, 2002 — Gross Carrying	Accumulated
	Amount	Amortization	Amount	Amortization
Intellectual property	$ 58,224	$ 9,268	$ 33,378	$ 6,211
Customer lists	32,867	2,600	21,000	1,580
Distribution rights	24,414	9,340	19,646	6,595

Amortization expense related to those intangible assets was $6.0 million for the nine months ended September 28, 2003. Amortization expense is estimated to be $8,332 in 2003, $9,032 in 2004, $8,269 in 2005, $7,620 in 2006 and $6,801 in 2007.

Note 7

Inventories consisted of the following:

	Sept. 28,	Dec. 29,
	2003	2002
Raw materials	$ 188,671	$ 154,552
Work-in-process	84,329	59,596
Finished goods	157,355	151,387
	$ 430,355	$ 365,535

Note 8

Business segment information:

	Three Months Ended — Sept. 28,	Sept. 29,	Percent		Nine Months Ended — Sept. 28,	Sept. 29,	Percent
	2003	2002	Change		2003	2002	Change
Sales
Commercial	$ 279,241	$ 262,116	7	%	$ 897,257	$	819,516	9	%
Medical	139,644	112,223	24	%	387,468		332,999	16	%
Aerospace	131,965	133,899	(1	%)	390,291		410,425	(5	%)
Total	$ 550,850	$ 508,238	8	%	$ 1,675,016	$	1,562,940	7	%
Operating profit
Commercial	$ 15,815	$ 18,742	(16	%)	$ 77,847	$	74,130	5	%
Medical	20,992	17,617	19	%	61,615		53,378	15	%
Aerospace	469	7,954	(94	%)	4,322		30,271	(86	%)
	37,276	44,313	(16	%)	143,784		157,779	(9	%)
Less:
Interest expense	6,580	6,280	5	%	19,755		18,555	6	%
Corporate expenses	5,387	4,893	10	%	15,423		14,076	10	%
Non-operating gain	—	—	—		(3,068	)	—	—
Income before taxes	25,309	33,140	(24	%)	111,674		125,148	(11	%)
Taxes on income	7,087	6,860	3	%	32,376		34,914	(7	%)
Net income	$ 18,222	$ 26,280	(31	%)	$ 79,298	$	90,234	(12	%)

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MANAGEMENT’S ANALYSIS OF QUARTERLY FINANCIAL DATA

Results of Operations:

Revenues increased 8% in the third quarter of 2003 to $550.9 million from $508.2 million in 2002. Overall growth was a result of currency gains and acquisitions which compensated for a decline in core business. Revenue improved in the Medical and Commercial segments while Aerospace Segment sales declined slightly. The Commercial, Medical and Aerospace segments comprised 51%, 25% and 24% of the Company’s net sales, respectively.

The gross profit margin was 25.5% in 2003 compared to 26.1% in 2002. Declines primarily in the Aerospace Segment and to a lesser extent the Commercial Segment more than offset an improvement in the Medical Segment. Operating expenses as a percentage of sales increased to 19.7% in 2003 compared with 18.3% in 2002 as all three segments’ operating expenses increased relative to sales.

Operating profit declined 16% in the third quarter to $37.3 million in 2003 from $44.3 million in 2002 resulting from declines in the Commercial and Aerospace segments, which more than offset a gain in the Medical Segment. Operating margin declined to 6.8% in 2003 from 8.7% in 2002 as all three segments reported a lower return on sales. The Commercial, Medical and Aerospace segments comprised 43%, 56% and 1% of the Company’s operating profit, respectively.

Interest expense increased in 2003 primarily as a result of fluctuations in exchange rates. The effective income tax rate was 28.0% in the third quarter of 2003 compared with 20.7% in 2002. The lower rate in 2002 was the result of a favorable income tax settlement of $3.1 million, or $0.08 per share. Net income and diluted earnings per share for the quarter were $18.2 million and $0.45, a 31% and 32% decline, respectively.

Industry Segment Review:

Commercial Segment sales gained 7% from $262.1 million in 2002 to $279.2 million on gains in the Automotive and Industrial product lines. Automotive sales increased on stronger foreign currencies and core improvement in Europe and Asia which more than compensated for a decline in North America as a result of pricing pressure and lower volume. Industrial product line sales benefited from the current year acquisitions of a designer and manufacturer of electronic and electromechanical products for the automotive, marine and industrial markets and an alternative fuels systems and component supplier in Europe. Marine sales declined modestly from the comparable quarter of 2002 due to lower marine aftermarket sales and weaker demand for certain non-marine products. Commercial Segment operating profit declined from $18.7 million in 2002 to $15.8 million in 2003 and as a result operating margin decreased to 5.7% from 7.2%. Automotive operating profit was relatively flat as volume gains were offset by costs to curtail a facility in North America. Marine operating profit fell primarily due to adverse product mix. Industrial operating profit declined as a result of lower core volume and costs associated with the start up of a new program in the alternative fuels group, which were offset in part by gains due to acquisitions.

Sales in the Medical Segment increased 24% to $139.6 million in 2003 from $112.2 million in 2002. Both product lines, Health Care Supply and Surgical Devices, reported double-digit gains. Acquisitions, including the current quarter purchase of a cardiothoracic devices business and an orthopedic instrument manufacturer in 2002, accounted for over two-thirds of this Segment’s growth. Also contributing to top line improvement were favorable currency rates and to a lesser extent new products. Operating profit increased to $21.0 million in 2003 from $17.6 million in 2002. In Health Care Supply volume improvement and cost reduction efforts led to higher operating profit. Surgical Devices operating profit increased as a result of acquisitions. Operating margin declined from 15.7% in 2002 to 15.0% in 2003 as a result of a lower contribution from acquired businesses.

Aerospace Segment sales declined 1% to $132.0 million in 2003 from $133.9 million in 2002. Double-digit sales declines in Cargo Systems and Manufactured Components were offset in part by an increase in Repair Services. The increase in Repair Services can be attributed to additional sales of low margin service offerings. Industrial Gas Turbine (IGT) Services sales declined slightly. Weaker demand and pricing

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constraints in the aerospace and power generation markets continued to impact this Segment. Operating profit declined 94% due largely to the weaker performance in IGT Services, including contract losses in the engineering services business and adverse product mix within the Segment as a whole. Operating margin declined to 0.4% in 2003 from 5.9% in 2002.

Cash Flows from Operations and Liquidity:

Cash flows from operating activities in the first nine months of 2003 were $155.4 million, up modestly from the prior year period of $150.6 million. Reduced working capital demand, particularly in the Aerospace segment, and higher depreciation compensated for lower net income. Total borrowings increased by $29.0 million to $451.9 million at September 28, 2003 as compared to $422.9 million at December 29, 2002. The increase was due to borrowings incurred to finance acquisitions and from currency exchange rate changes offset by debt repayments. The ratio of total debt to total capitalization decreased to 31% at September 28, 2003 from 32% at December 29, 2002.

Forward-Looking Statements:

This quarterly report includes the Company’s current plans and expectations and is based on information available to it. It relies on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties.

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports will be made available free of charge through the Investor Relations section of the Company’s Internet website (http://www.teleflex.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

ITEM 4. Controls and Procedures

As of the end of the quarter ended September 28, 2003, our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures provide reasonable assurance that we record, process, summarize, and report information required to be disclosed by us in our periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. Subsequent to the date of their evaluation, there have not been any significant changes in our internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K

1. Exhibits:

Exhibit
Number	Description
31.1	Certification of Chief Executive Officer,
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer,
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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1. During the quarter ended September 28, 2003, the Company filed the following reports on Form 8-K:

On July 1, 2003 Teleflex Incorporated filed a report on Form 8-K dated July 1, 2003 to file as an exhibit a press release announcing the purchase of the cardiothoracic devices business from Genzyme Corporation.

| On July 10, 2003 Teleflex Incorporated filed
a report on Form 8-K dated July 7, 2003 to file as an
exhibit a press release announcing the acquisition of
Koltec-Necam B.V. |
| --- |
| On July 17, 2003 Teleflex Incorporated filed
a report on Form 8-K dated July 16, 2003, to file as
an exhibit a press release announcing earnings for the quarter
ended June 29, 2003. |
| On August 12, 2003 Teleflex Incorporated
filed a report on Form 8-K dated August 12, 2003 to
file as an exhibit the certifications of the Company’s
Chief Executive Officer and Chief Financial Officer required
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| On September 10, 2003 Teleflex Incorporated
filed a report on Form 8-K dated September 9, 2003 to
file as an exhibit a press release announcing anticipated
earnings for the Company’s third quarter and fiscal year
2003. |

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TELEFLEX INCORPORATED

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TELEFLEX INCORPORATED
/s/ HAROLD L. ZUBER, JR.
Harold L. Zuber, Jr.
Executive Vice President and Chief Financial
Officer
(principal financial officer) and duly
authorized officer

November 11, 2003

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EXHIBIT INDEX

Exhibit
No.	Description
31.1	Certification of Chief Executive Officer,
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer,
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer,
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.